Is It Time to Consider Time Warner?

Richard Saintvilus | Contributor

Thursday, 15 Nov 2012 | 12:31 PM ETThe Street

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Mark Lennihan

Media conglomerate Time Warner ontinues to be one of those names on Wall Street that seem to always fly under the radar. Remarkably, this is despite the company's recent string of market-beating performances.

When assessing Time Warner's current standing amongst its peers, which include names such as Walt Disney and Comcast, it becomes clear the stock is undervalued. However, after the company's third-quarter earnings report, which I felt were "mixed," I'm thinking I might need to curb my enthusiasm — but for how long? (Comcast is the majority owner of NBC Universal, the parent company of CNBC and CNBC.com.)

The Quarter That Was

For the fiscal third-quarter ending Sept. 30, the company reported net income of $838 million, or 86 cents per share. Not only was this higher than analysts' estimates of 82 cents, but it represented year-over-year growth of more than 2 percent — helped by strong performances in the company's cable division.

On the other hand, revenue was a disappointment — falling 3 percent to $6.84 billion and missing analysts' estimates of $6.89 billion. The company experienced worse-than-expected declines in its film and TV entertainment and publishing segments, which served to offset solid growth in its network segment.

Consequently, Time Warner's adjusted operating income also declined by 1 percent to $1.6 billion. This is even though margins arrive flat year-over-year.

Overall, this was a good quarter for the media giant. With its performance, Time Warner remains on track for another solid year. The company has produced on average 3.3-percent growth in net income spanning back the last five quarters.

In terms of outlook, aside from expecting low double-digit growth from a base of $2.89, which the company earned last year, Time Warner remained steadfast in its previous projections — keeping outlook for the fiscal year the same. But the company did say that its film "Argo" was doing quite well at the box office and it expects ticket sales from the movie to help boost revenues in the current quarter. Also in pipeline is the highly anticipated release of "The Hobbit" next month.

Moving Forward

While listening to the conference call, it was clear that the company's management understands not only where the company is today, but where it needs to be in the future. In discussing the third-quarter performance, Time Warner's CEO, Jeff Bewkes said: "This performance illustrates that our investments in content and technology are continuing to pay off."

I have to agree with Bewkes as there have been very few media companies that have matched Time Warner in terms of capital re-investments.

One area where the company has made a considerable amount of investment is in its "TV Everywhere" initiative as it tries to capitalize on the growth of mobile devices. To that end, Time Warner has recently formed partnerships with Comcast and Viacom to allow subscribers access to some of its most popular channels at no extra cost.

These rivals see the writing on the wall as streaming giants such at Netflix, Hulu, and even Amazon.com's Prime pose potential threats by offering live TV viewing options to their subscribers. What's more, customers have shown they want this flexibility and prefer to not be confined to their living rooms.

Time Warner understands the future of TV and anticipates that at some point the subscription model will venture on to the cloud. The company is poised to serve as a pioneer in what appears to be a transformation of traditional media.

Bottom Line

For such a mature company, Time Warner never takes its eyes off of the future. This is one of its most impressive qualities. However, that revenue fell slightly this quarter was a disappointment, breaking a string of four consecutive quarters of revenue growth, which dated back to the third quarter of 2011. Nonetheless, with a price-to-earnings ratio of 16, lower than both Comcast and Disney , the stock still looks attractive.

What's more, aside from paying a respectable yield, Time Warner is fundamentally sound — ending the quarter with $3.19 billion in cash and operating cash flow of $3.5 billion.

With shares trading at $44, there is considerable amount of value as the stock should see $50 to $55 during the course of the next six to 12 months. But investors have to be patient for the stock to work — particularly as it executes its mobile strategy.